Agents of Change : Caps Force Travel Sellers to Regroup

When the major airlines last year capped the commissions they pay to travel agents, Joe McClure knew his agency was in for a spell of turbulence.

The president of Montrose Travel near Glendale calculated that his agency stood to lose $20,000 a month in revenue unless he moved quickly to fill the gap.

So McClure beefed up his agents' sales incentives and retrained employees to focus their energy on selling and service, rather than administrative chores. The agency dropped unprofitable accounts, sheared some overhead and redoubled its marketing efforts just as competitors were slashing their ad budgets. The firm also launched a high-volume ticket consolidation venture to capture a chunk of the fast-growing market for rock-bottom air fares.

The result: 1995 sales topped $30 million, net income was the highest in company history and Montrose Travel was recently named a winner of the national Blue Chip Enterprise Award, which recognizes small businesses that prosper in the face of adversity.

"A lot of agencies adopted this woe-is-me attitude" after the airlines instituted the caps, McClure said. "We looked at it as a growth opportunity."

Not all have adapted to the new terrain. Hundreds of agencies have closed their doors or been forced into mergers to stay afloat since carriers altered their straight 10% commission structure in early 1995 and slapped a ceiling of $25 on one-way tickets and $50 on round-trip fares for domestic flights.

Millions in revenue vanished overnight. Panic gripped an industry where ticket commissions make up a significant portion of the average agent's compensation.

But serious travel sellers have hunkered down for the long haul. Agencies are slashing costs, instituting fees, changing their client mix, speeding automation and even peddling luggage and cameras from their storefronts to make an extra buck.

While no one is celebrating the loss of revenue, many agents admit that the new environment has forced them to sharpen their business skills and become tougher competitors.

"There was a lot of complacency in this industry," said Ellie Knight, a Brea-based travel industry management consultant. "The caps were a wake-up call. Now agents have to get serious or get out."

Long a laid-back business of dabblers and travel buffs, the travel agent industry is undergoing a radical transformation. Budget competitors such as ticket brokers and consolidators have grabbed market share from traditional agencies, while computer technology is allowing consumers to book more trips from home. Last year's ticket caps finally forced many agencies to make changes they had been considering for some time.

One of the most common, and controversial, strategies embraced by agents over the last year has been the implementation of service fees. Carol Raetz, owner of Boulevards of Travel in Newport Beach, now charges $5 to $10 to process, change or void airline tickets. She also requires a $100 nonrefundable deposit to research a major excursion.

Raetz figures it costs her $25 to process a single ticket. At a 10% commission rate, that means she loses money on every fare less than $250. Before the ticket caps, she simply offset those losses with profits from higher-priced tickets. Ditto for hours spent researching trips that clients never booked. But Raetz says the caps have forced her to make every transaction pay for itself.

"Customers who want the services of a good agent have accepted the fees," said Raetz, who adds that she has lost very few clients. "We're professionals, and we've had to start charging like it."

In fact, travel sellers say they've had to become as proficient at preparing an income statement as a travel itinerary. Agency owners now scrutinize their overhead expenses much like they prowl the computer terminal for bargain fares.

Raetz froze her agents' base salaries and has taken to buying office supplies in bulk. Montrose Travel renegotiated its reservation system contract and funneled document deliveries to an outside courier to save money. Jeff Abels of Bixby Knolls Travel in Long Beach reduced his staff, switched long-distance carriers, pulled out of the Yellow Pages and dropped unprofitable accounts after sifting through every client his firm serves to figure out which were money losers.

"We developed mathematical models for everything," Abels said. "You have to figure out what things cost now."

Like many agencies, Abels has changed his client and product mix. A year ago, more than half his revenue came from airline ticket sales to corporate customers. Today, the majority of his business comes from the sale of leisure travel, such as cruises and package tours, which offer higher profit margins.

Firms have banded together into large consortiums to gain more buying power from travel suppliers. Agencies are also supplementing the bottom line through sales of travel-related services and merchandise.